Tether Fails to Uphold US Sanctions against Tornado Cash

[TL; DR]

The United States Treasury Office of Foreign Assets Controls ((OFAC) has imposed sanctions on wallets linked to Tornado Cash.

The sanctions on selected wallet addresses means that United States persons and organizations should not make transactions with these.

It is the first time that a government has imposed sanctions on a smart contract rather than an organization or individual.

Tether has promised to adhere to the sanctions if the US regulatory authority directly communicates with it to that effect.

Keywords: Tether, Tornado Cash, OFAC, digital addresses, hacking, Lazarus Group, crypto mixer, compliance program

The absence of explicit regulation on the blockchain and cryptocurrency, at times, creates uncertainty in the sector. For example, currently there is uncertainty regarding the lack of clarity on the saga between Tether USDT and US Treasury Department in dealing with the Sanction the later imposed on Tornado Cash, a decentralized organization which helps to hide the identities of parties behind certain blockchain transactions.

United States Sanction against Tornado Cash

The United States Treasury Office of Foreign Assets Controls ((OFAC), responsible for monitoring transactions in digital and security assets, imposed sanctions on Tornado Cash, an open-source cryptocurrency mixer. This United States Federal agency accuses Tornado Cash for externalizing over $455 million worth of cryptocurrencies.

Source: Utoday

OFAC accuses Tornado Cash of helping malicious cryptocurrency actors, such as North Korean connected hacking syndicate known as Lazarus Group to steal millions of dollars through crypto hacking. According to Chainanalysis, Tornado Cash has generated over 7.6 billion since it started operating in 2019. It also claims that about 30% of these amounts are tied to malicious actors such as the Lazarus Group.

The United States Treasury Office of Foreign Assets Controls has pointed out that the illicit activities include the movement of cryptocurrencies stolen from Axie Infinity’s Ronin Bridge Protocol, Harmony Bridge and Nomad Bridge. OFAC sanctioned several digital addresses, routing addresses and proxy addresses.

There are a total of 44 addresses which individuals and organizations in the United States should not do business with. Through this agency, the United States government requires any companies dealing with cryptocurrencies to update it about their “sanctions compliance programs.”

What is Tornado Cash?

It becomes easier for you to understand the saga if you realize Tornado Cash’s contribution in the blockchain sector.

As a fact, Tornado Cash is a decentralized crypto mixer whose main contribution is to carry out transactions in a way that hides the users’ identities. It does that in a way which makes it difficult for third parties to tell the sources and destinations of cryptocurrencies.The aim of crypto mixers is to hide the transaction history of the users, thereby maintaining high privacy.

Primarily, the protocol shuffles all the cryptocurrencies it receives and is in its custody at a certain time. It is like the entire crypto amount the smart contract has at any time is pooled together and redistributed to the destination addresses. The receiving wallet addresses get the cryptocurrency from other addresses, not the original ones that send them. As such, third parties cannot verify the source of the cryptocurrency that goes to any single address.

Source: Postsen

The process of hiding the source of cryptocurrencies works well with people who live in countries with autocratic governments that may wish to track the crypto activities of certain individuals. The bad side to this is that mixers hide the activities of criminal organizations such as the Lazarus Group, well-known for its hacking activities. The United States government believes that Tornado Cash has facilitated the laundering of over $7 billion worth of cryptocurrencies since 2019.

However, Tornado Cash works in a non-custodial way since it uses smart contracts. This means that Tornado Cash does not hold the assets of its users. The users have the power to make transactions the way they want. As a result, it does not have full control over the cryptocurrencies that pass through its system.

Relationship between Tether and Tornado

Just like many other organizations that deal with cryptocurrencies, Tether has a work relationship with Tornado Cash. For example, Tether’s users can send cryptocurrencies to Tornado Cash and vice versa. This implies that if Tether upholds the sanctions the United States imposed on Tornado Cash, it should blacklist the said addresses whether they are routing, wallet or proxy ones. Incidentally, through its blog Tether promised to uphold the sanctions the United States imposed on the parties it works with.

Why Tether has not Uphold the Sanctions OFAC

Presently, Tether has not yet blacklisted the addresses which OFAC sanctioned. There are various reasons for that.

It is the first time that a national government has sanctioned a smart contract code, creating confusion on how organizations can deal with that. According to crypto experts, the sanctions challenge the value of privacy and anonymity of transactions engrained in the blockchain system. As a result, some firms find it difficult to uphold such sanctions.

Also, many people value the blockchain technology since it is against governments and other central authorities’ control and censorship. If Tether blacklists these wallets it is going against the core principle of decentralization. Upholding the sanctions will cause panic among its users and the entire crypto community. Some analysts pointed out that sanctioning a smart code contract is like blocking emails, something the society does not expect.

Writing on its blog, Tether promised to take action against any address which OFAC has blacklisted. It also said that it will freeze assets in such wallets as well as scrubbing crypto deposits to the wallets or withdrawals from them. In other words, it confirms that it will not carry transactions with sanctioned wallets.

Source: Cointelegraph

However, Tether made it very clear that it can only take measures against such addresses if OFAC or any US responsible government agency has communicated with it.

Tether wrote, “We are in almost daily contact with key law enforcement officers and pride ourselves on the timeliness with which we respond to their requests. When Tether receives an applicable/legitimate request from a verified law enforcement agent to freeze a privately held wallet, the Company complies with the freeze.”

Therefore, the main reason for non-compliance is that it has not received the necessary communication from the Federal government.

It further said that it cannot arbitrarily take action against the listed addresses. This is because doing so will disrupt the activities of the users in a reckless way. This may also interfere with the investigations the US government is carrying.

Tether compliance supervision

Currently, Tether has not publicised its supervision program related to the case of Tornado Cash. However, in its blog it said that it has an international compliance program in place. It said, “Tether does consider OFAC Sanctions as part of its world-class compliance program.”

Conclusion

In short, the United States Treasury Office of Foreign Assets Controls imposed sanctions against 44 addresses. This compels United States companies and individuals to stop transactions with such addresses. It also requested other organizations dealing with cryptocurrencies to give it updates about their sanction compliance programs.

Author: Mashell C., Gate.io Researcher

This article represents only the views of the researcher and does not constitute any investment suggestions.

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